Good News: The Start-Up Rate Is Falling

At first blush, the revelation of recent data showing that fewer people started their own businesses last year than in previous years does not appear to be good news. But that spin would also be a classic example of viewing the glass as half empty. A peek under the surface of that information reveals signs of a healthier economy, and suddenly, the shrinking number of new entrepreneurs is not such bad news after all.

The Kaufman Foundation used Census Bureau data to discover that 0.28 percent of Americans started their own business last year, down from 0.30 percent in 2012. It doesn’t seem like much of a drop. But, according to the foundation, the significant finding was that the start-up rate returned to pre-recession levels. And pre-recession levels is another way of saying that the start-up rate has returned to levels seen when the economy was growing.

Additionally, according to the study, the force behind the reduced number of start-ups is an improved employment picture. As more people go back to work, the number of unemployed starting a business for financial survival wanes. “That’s a good sign,” Dane Stangler, Kaufman’s research chief, reports. “Even though the overall rate is down, the composition of who is starting businesses, in terms of necessity versus opportunity, shows an encouraging trend.”

Stangler cited another statistic in line with 1999-2000 levels: 22 percent of those who started businesses in 2013 were previously unemployed. In the three years following the Great Recession, that percentage had climbed to 26, and the overall rate of start-ups per capita among the working aged in the U.S. peaked at 33 percent. The new, downward trend, along with an unemployment rate of 6.7 percent, indicates that entrepreneurs are starting businesses as a passion, rather than out of economic necessity, Stangler said.

Research also showed that the declining start-up rate cut across all demographic groups. Still, immigrants (0.43 percent) remained more than twice as likely to start a business as American-born residents, while overall, men (0.34 percent) were more likely to launch a start-up than women (0.22 percent).